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Production under foreign ownership and domestic volatility: an empirical investigation at the sector level

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  • Sandrine Levasseur

    (OFCE)

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    Abstract

    The main goal of this paper is to assess empirically to which extent the volatility of production is due to activities of firms under foreign ownership. Following Bergin et al. (2009) and Levasseur (2010), we postulate that multinational firms can use their contractors and their sites of production located abroad to “export” some of their domestic fluctuations, thus exacerbating further the business cycles of the hosting economy. Using a sample of twelve manufacturing sectors in eight EU countries and a data panel estimation, we find that the higher the share of firms under foreign ownership in a given sector of a country, the higher the volatility of production in that sector of that country, thus confirming the aforementioned assumption. Moreover, our estimates show how important to deal with sectorspecific volatility, a result we attribute to idiosyncratic shocks arising at the sector level from both demand and supply sides. Our findings are robust to various ways of extracting cycles and to different time spans for measuring volatility.

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    File URL: http://spire.sciencespo.fr/hdl:/2441/5l6uh8ogmqildh09h564gf28g/resources/wp2011-01.pdf
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    Bibliographic Info

    Paper provided by Sciences Po in its series Sciences Po publications with number 2011-01.

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    Date of creation: Mar 2011
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    Handle: RePEc:spo:wpmain:info:hdl:2441/5l6uh8ogmqildh09h564gf28g

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    Related research

    Keywords: Offshoring; European integration; sector analysis; business cycles volatility; data panel estimation.;

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    1. Carre, M & Levasseur, S & Portier, F, 1996. "Economic Integration, Asymmetries and the Desirability of a Monetary Union," Papiers d'Economie Mathématique et Applications 96.54, Université Panthéon-Sorbonne (Paris 1).
    2. Furceri, Davide & Karras, Georgios, 2007. "Country size and business cycle volatility: Scale really matters," Journal of the Japanese and International Economies, Elsevier, vol. 21(4), pages 424-434, December.
    3. Olfa Alouini & Paul Hubert, 2010. "Country size, Growth and Volatility," Documents de Travail de l'OFCE 2010-18, Observatoire Francais des Conjonctures Economiques (OFCE).
    4. Robert C. Feenstra & Robert E. Lipsey & Lee G. Branstetter & C. Fritz Foley & James Harrigan & J. Bradford Jensen & Lori Kletzer & Catherine Mann & Peter K. Schott & Greg C. Wright, 2010. "Report on the State of Available Data for the Study of International Trade and Foreign Direct Investment," NBER Working Papers 16254, National Bureau of Economic Research, Inc.
    5. Bertola, Guiseppe & Caballero, Ricardo J, 1994. "Irreversibility and Aggregate Investment," Review of Economic Studies, Wiley Blackwell, vol. 61(2), pages 223-46, April.
    6. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
    7. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
    8. Sandrine Levasseur, 2006. "Convergence and FDI in an enlarged EU: what can we learn from the experience of cohesion countries for the CEECS?," Documents de Travail de l'OFCE 2006-12, Observatoire Francais des Conjonctures Economiques (OFCE).
    9. Crucini, Mario J, 1997. "Country Size and Economic Fluctuations," Review of International Economics, Wiley Blackwell, vol. 5(2), pages 204-20, May.
    10. Davide Furceri & Georgios Karras, 2008. "Business cycle volatility and country zize :evidence for a sample of OECD countries," Economics Bulletin, AccessEcon, vol. 5(3), pages 1-7.
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